April 3, 2011
The Honorable Jack Kingston
Chairman
Agriculture, Rural Development, Food and
Drug Administration & Related Agencies
Appropriations Subcommittee
United States House of Representatives
2368 Rayburn House Office Building
Washington, DC 20515
The Honorable Sam Farr
Ranking Member
Agriculture, Rural Development, Food and
Drug Administration & Related Agencies
United States House of Representatives
1126 Longworth House Office Building
Washington, DC 20515
Dear Representatives Kingston and Farr:
The undersigned organizations are writing to you regarding the Section 538 Multifamily Loan Guarantee program which is administered by the United States Department of Agriculture’s (USDA) Rural Development (RD) agency within Housing and Community Facilities. We would urge you as you complete consideration of the Fiscal Year 2011 budget to provide the necessary appropriations to allow for a program level of $129 million and then in Fiscal Year 2012, consider allowing fees to be charged, thus making the program revenue neutral.
As background, the program was enacted in 1996, as Section 538 of the Housing Act of 1949, to build new affordable rural housing as well as preserve the existing Section 515 portfolio. The Section 538 program is targeted to low- and moderate-income rural residents with incomes no greater than 115 percent of area median income, though most residents are low or very low income. Qualifying properties include either new construction or acquisition/rehabilitation of properties. Section 538 loans are also used in conjunction with HOME and Low Income Housing Tax Credits (LIHTC) throughout rural America.
The Administration’s Fiscal Year 2012 budget proposal would eliminate funding for the Section 538 program. The justification in the budget for this elimination was two fold: the Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) programs can provide the same funding and the increase in the subsidy rate for the program due to high numbers of defaults. The Administration has indicated that in the last two years, the subsidy rate has gone from 3.23% to 11.73%. We refute both statements, particularly the default rate. We also do not believe there are equivalent FHA programs. Since the FY 2011 budget has not yet been resolved, there is also concern that funding for the program could be reduced for FY 2011 from previously released numbers of $129 million.
Another important issue to consider for FY 2011 is that Section 538 transactions also have some funding from the Low Income Housing Tax Credit (LIHTC) program. Should full funding of the program not be provided, there will not be enough money to fund projects in the pipeline. Many developers will be faced with recapture of credits and limited ability to participate in the LIHTC program in the future.
We believe that the Section 538 program can be maintained or even expanded while saving appropriations if an upfront fee of 1% and an annual fee of 0.50%, also known as 50 basis points could be charged. These fees would generate sufficient funds to essentially make the program revenue neutral at the $129 million annual guarantee.
While HUD does have several multifamily mortgage insurance programs, none of these programs can take the place of the Section 538 program. HUD’s programs are designed for larger, more expensive properties than we generally see in rural areas. Moreover, the Section 538 program is a vital program for preserving existing Section 515 properties. Either by contract or statute, Section 515 owners cannot freely prepay their mortgage loans, and indeed, RD laws and regulations require preserving these properties. HUD’s multifamily preservation mortgage program, the Section 223(f) program, requires prepaying existing financing, which conflicts with Section 515 requirements.
The default rate and therefore the subsidy rate for the program are incorrect as relayed by the Administration in its FY 2011 and FY 2012 budgets. The Council for Affordable and Rural Housing (CARH) has numbers that can demonstrate the default rates to be less than the agency transmitted in their budget. The 2004 NOFA for the Section 538 Program awarded the borrower points based on Loan to Value ratios and the 2005 NOFA awarded points for Loan to Cost ratios. In FY 2005 (almost six fiscal years ago), the agency was tightening its underwriting guidelines as they were moving towards having every loan securitized by the Government National Mortgage Association (GNMA). GNMA requires the Loan to Cost Ratio to be 50% or less if there is a USDA Section 515 loan that would subordinate to a new Section 538 loan. Thus every year hence, the NOFA requirements have become tighter with respect to the underwriting qualities of the Section 538 loans. The agency has been funding loans that have “real” equity in the project, generally that in the form of tax credit equity. The weighted average loan to cost ratio for a majority of the loans is 25.81%.
Since the program began, the Section 538 program has originated over $450 million in loans and over $2.2 billion in local development. These loans have been responsible for the construction or rehabilitation of over 400 affordable housing complexes throughout rural America, creating more than 35,000 jobs. We urge you to continue supporting this very important rural housing program.
Sincerely,
Affordable Tax Credit Coalition
Council for Affordable and Rural Housing
Enterprise Community Partners, Inc.
Housing Assistance Council
Institute of Real Estate Management
Institute for Responsible Housing Preservation
Local Initiatives Support Corporation
National Affordable Housing Management Association
National Apartment Association
National Association of Home Builders
National Leased Housing Association
National Multi Housing Council
National Rural Housing Coalition

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